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Week 2 Notes

by: Elliott Saslow

Week 2 Notes ECON 2020

Elliott Saslow
GPA 3.0
Principles of Economics: Macroeconomics
Giacomo Rondina

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About this Document

Week 2 notes, all from lecture slides
Principles of Economics: Macroeconomics
Giacomo Rondina
Class Notes
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This 14 page Class Notes was uploaded by Elliott Saslow on Friday September 4, 2015. The Class Notes belongs to ECON 2020 at University of Colorado taught by Giacomo Rondina in Fall 2015. Since its upload, it has received 46 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at University of Colorado.


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Date Created: 09/04/15
Measuring a Nation s income Lecture 4 What is Gross Domestic Product GDP How is GDP related to a nation 39 s Total income and spending What are the components of GDP How is GDP corrected for Inflation Does GDP measure society 39 s well being Income And Expenditure Gross Domestic Product GDP measures the income of everyone in the econmy GDP also measures total expenditure on the economy 39 s output of G amp S goods and services For the economy as a whole INCOME EQUALS EXPENDITURE Because every dollar a buyer spends is a dollar of income for the seller The Government Collects taxes buys gamps The Financial System matches savers supply of funds with borrowers demand for loans The Foreign Sector Trades GampS nancial assets and currencies with the country s residents Gross Domestic Product The Market Value of all final goods and services produced within a country in a given period of time All goods measured in the same units ex US dollars and things that are not exchanged do not count think housework What is a nal good A good intended for the end user Whereas an Intermediate good is used as a component or ingredient in the production of other goods GDP only includes nal goods as they already include the value of intermediate goods Includes Tangible items Intangible Items Dvds Dry cleaning Mountain Bikes Cell Phone service Coffee Concerts Printed by Wolfram Mathematica Student Edition 2 I Lecture 4nb All currently produced goods not goods from the past Usually measured in a years worth or a quarters worth 3 months Always within the country Components and calculation GDP is total spending broken into 4 compo nents Consumption c Investment I Gov Purchases G Net Exports NX All components add to GDP Denoted by y Y C I G NX Consumption C Is total spending by Households on GampS Includes rent but for homeowners does not inculde purchase price rather the rental value Investment I Total spending on goods that will be used in the future to produce more goods Includes Capital Equipment machines tools Structures factories office buildings houses Inventories Goods produced but not yet sold NOT FINANCIAL ASSETS LIKE STOCKS AND BONDS Gov Purchases G Is all spending on the g amp s purchased by govt at the federal state and local levels G excludes transfer payments such as Social Security or unemployment insurance benefits They are not purchases of g amp s Net Exports NX NX exports imports Exports represent foreign spending on the economy s G amp S Imports are the portions of C I G that are spent on G amp S produced abroad Real VS Nominal GDP Inflation can distort economic Variables like GDP so we have two versions Nominal GDP Values output using current prices Not corrected for inflation Computed using the current price Printed by Wolfram Mathematica Student Edition Lecture 4nb I 3 Real GDP Values output using the prices of a base year IS corrected for inflation computed using a base year Example use the price of coffee from 2011 to calculate the GDP rather than the the current price in 2015 See nominal vs read gdp graph jpg The GDP deflator Is a measure of the overall level of prices DEFINITION Nominal GDP Real GDP GDP DEFLATOR 100 X This is a way to measure an economys Inflation Rate GDP and Economic Well being Real GDP per capita is the main indicator of the average persons standard of living Not a perfect measure of well being Robert Kenedy on GDP Critisim Gross Domestic Product does not allow for the health of our children the quality of their education or the joy of their play It does not include the beauty of our poetry or the strength of our marriages the intelligence of our public debate or the integrity of our public officials It measures neither our courage nor our wisdom nor our devotion to our country It measures everything in short except that which makes life worthwhile and it can tell us everything about America except why we are proud that we are Americans Senator Robert Kennedy 1968 What doesn t GDP value The quality of the enviroment Leisure time Non Market activity such as child care from a parent An equitable distribution of income Why should we care Having a large GDP enables a country to afford better schools a cleaner environment health care etc Many indicators of the quality of life are positively correlated with GDP See gdp vs life graphics Clicker questions Printed by Wolfram Mathematica Student Edition 4 I Lecture 4nb ACTIVE LEARNING 1 GDP and its components In each of the following cases determine how much GDP and each of its components is affected if at all A Debbie spends 300 to buy her husband dinner at the finest restaurant in Boulder VYVCV VGVNX VC 300 VY 300 B Sarah spends 1200 on a new laptop to use in her publishing business The laptop was built in China VI 1200 VNX 1200 VY0 C Jane spends 800 on a computer to use in her editing business She got last year39s model on sale for a great price from a local manufacturer USED DOESNT COUNT VY0 D General Motors builds 500 million worth of cars but consumers only buy 470 million worth of them VC 470 Mill VI 30 Mill inventory is included in l VI 500 Million E An Italian tourist visits Boulder Colorado in 2015 and spends 200 in a local restaurant VNX 200 VY200 Remeber that since they are from another country it matters if they where from America it woudnt count Printed by Wolfram Mathematica Student Edition Summary of lecture 2 1 Ten Principles of Economics 2 Our first Model circular Flow Diagram 3 Our second model Production Possibility fromtier GampS Revenue Bought Markets for Goods and Services Spending GampS Sold if Firms HouseHoIds it it Labor Land Capital Income Factors of r Production Maarkets for Factors of Production Wages rent profit The Production Possibilities Frontier PPF a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology This can be used to study Trade off Efficiency and Inefficiency opportunity Cost Economic Growth Example Two good Computers and wheat Reasource Labor Economy has 50000 labor hours per month available for production 1 computer takes 100 hours of labor 1 ton of wheat requires 10 hours of labor We could have two things Points on PPF Production Possibilities Frontier Possible and all resources are fully used Points under the PPF Possible not fully efficient though because not all resources are fully utilized Above Not possible Printed by Wolfram Mathematica Student Edition 2 I Lecture3nb Opportunity Cost Throwback Moving along the PPF involves shifting reasources from the production of one good to the other Implies trade off getting more of one means sacrafice the other Slope of the PPF tells you the opportunity cost of one good in terms of the other ii I Mountain Bikes AMarket is a group of buyers and sellers of a particular product A Competitive market is one with many buyers and sellers but each cannot control the price In a Perfectly Competitive market buyers and selleers are quotPrice Takersquot Which means that they cannot individually affect the price The Quantity Demanded of any good is the amound of the food that buyers are willing and able to purchase Law of Demand the claim that the quantity demanded of a good falls when the price of the good rises other factors equal Demand Schedule A table that shows the relationship between the price of a good and the quantity demanded Demand Curve Shifters The demand curve shows how price affects the quantitiy demanded Other factors equal Printed by Wolfram Mathematica Student Edition causes a movement along the Demnad Curve Shifts the Demand Variable Price It of Buyers Curve Income Shifts the Demand Curve Expectations Shifts the Demand Curve Supply Quantity Supplied of any good is the amound that sellers are willing and able to sell Law of Supply Quantity supplied of a good rises when the price of the good rises OTE other things equal Supply Schedule A table that shows the relationship between the price of a good and the quantity Supplied Supply curve shifters The supply curve shows how price aggects the quantity supplied OTE causes a movement along the Supply Curve Shifts the Supply Curve Shifts the Supply Curve Shifts the Supply Curve Shifts the Supply Curve Variable Price Input prices Technology It of sellers Expectations Using them together The supply and demand curve intersect at the equilibrium price Surplus and shortage Surplus When quantity Supplied is greater than quantity Demanded Shortage When quantity demanded is greater than quantity demanded Printed by Wolfram Mathematica Student Edition Lecture 3 nb 3


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